2811: Avoid These 3 Pitfalls of Debt Consolidation by Miranda Marquit of Good Financial Cents

[00:00:00] This is Optimal Finance Daily. Avoid these three pitfalls of debt consolidation by Miranda Marquit of Good Financial Cents.com and I'm your host and personal finance enthusiast, Diana Merriam. Welcome back to Optimal Finance Daily, where every day

[00:00:18] I read and offer commentary on some of the best personal finance blogs on the web in about 10 minutes or less. So with that, let's get right to it as we optimize your life. Avoid these three pitfalls of debt consolidation by Miranda Marquit of Good Financial Cents.com

[00:00:41] Debt consolidation can be an effective strategy to tackle overwhelming debt, but it's not a guaranteed solution. Avoid common pitfalls like falling back into old spending habits or confusing debt settlement with consolidation as they can worsen your financial situation.

[00:01:00] One of the best things you can do for your finances is to pay down debt. There are a number of different strategies designed to help you get rid of your debt. Among the more popular strategies is debt consolidation.

[00:01:13] With debt consolidation, you gather all your debts in one place. You can get a debt consolidation loan that pays off all of the smaller loans and leaves you with the larger loan, or

[00:01:24] you can manage your debt consolidation through a third party, which collects payments from you and then disperses it to your creditors. Debt consolidation can be a great way for some consumers to put a solid dent in their debt.

[00:01:38] This is because it gets all of the debt in one place where it can be easily managed. You only have one payment to worry about and one interest rate. Being able to concentrate your efforts can go a long way towards getting rid of debt.

[00:01:53] However, debt consolidation isn't for everyone and it's no guarantee that you'll be able to get rid of your debt effectively, especially if you fall prey to the following three pitfalls. Number one, using your freed up lines of credit.

[00:02:09] If you get a debt consolidation loan, the result is more freedom in terms of lines of credit. You paid off your credit card balances with the debt consolidation loan, so now you have fully available credit cards.

[00:02:21] Many consumers start using these credit cards again as soon as the debt consolidation process is complete. This can be a huge mistake. Savvy use of credit cards with zero APR can be helpful,

[00:02:34] but you have to pay off the balances each month in order to avoid high interest charges. If you continue to use your credit cards and carry balances, you'll rack up even more debt than you had to begin with.

[00:02:47] Don't use your freed up lines of credit unless you're done paying off your debt consolidation loan and your spending is under control so that you aren't living beyond your means. I worked with one person who borrowed money using Lending Club to pay off all their high interest debt.

[00:03:04] 18 months later, they had double the debt and no way to consolidate. Don't be this person. Number two, failure to change your spending habits. If you aren't planning to completely change your spending habits, debt consolidation in any form isn't going to help you.

[00:03:21] You need to stop thinking of debt as the problem. In most cases, debt isn't the problem. It's a symptom of your spending problem. You can pay off debt time and time again,

[00:03:32] but unless you change your current habits and make a fundamental shift in the way you approach your money, you will end up back in debt. The more times you go through the debt cycle, the more interest you pay.

[00:03:44] This eats into your ability to build wealth over the long haul. If you want to really make your debt consolidation effort a success, your plan has to be accompanied by fundamental changes in the way you handle your money. And number three, using debt settlement instead of debt consolidation.

[00:04:04] A third-party company can help you organize your debt and pay it off quickly through a form of consolidation. Properly certified credit counselors can help you create and execute a paydown plan. You make one payment and the company handles all of the transactions.

[00:04:21] You'll be charged a fee for the service, but for some consumers this fee amounts to less than they would have paid in interest had they continued struggling with a debt payoff plan on their own.

[00:04:32] What you have to watch out for are companies that actually involve you in debt settlement rather than debt consolidation. With debt settlement, you make regular payments to the company and the money is held in an account. The company withholds payment from your creditors.

[00:04:48] After a time, your creditors are willing to settle for a lump-sum payment that is less than what you owe. The money you've been paying into an account is used to settle with your creditors. However, this process takes a very large toll on your credit.

[00:05:03] As long as you keep making payments on time, your debt consolidation efforts won't likely have a huge impact on your credit score, although your credit utilization will remain high. Go through debt settlement though and your payment history, the largest factor in determining your score, will be destroyed.

[00:05:22] Editor's note. For some people, ruining their credit for the sake of finally getting out of debt is a small price to pay. Your credit can always come back if you're smart about how you manage your money going forward.

[00:05:34] Before you agree to allow a third party to handle your debt consolidation, make sure you understand what it entails and that you truly understand the process. The bottom line. Avoid these three pitfalls of debt consolidation.

[00:05:49] Debt consolidation, a strategic approach to financial stability, can be a lifeline for individuals overwhelmed by multiple debts. However, it's not a one-size-fits-all solution. The effectiveness of this strategy hinges on disciplined financial behavior, avoiding the temptation of available credit and a thorough understanding of the consolidation process.

[00:06:12] Missteps such as falling back into old spending habits or mistaking settlement for consolidation can exasperate financial woes. For those willing to adapt and remain vigilant, debt consolidation can be a stepping stone towards fiscal responsibility and long-term financial health. You just listened to the post titled

[00:06:37] Avoid These Three Pitfalls of Debt Consolidation by Miranda Marquit of GoodFinancialCents.com And I'll be right back with my commentary. For a lot of people, myself included, different finance apps can be stressful and make it difficult to manage finances.

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[00:07:10] I definitely wouldn't be able to allocate my finances or plan as clearly without help from Monarch. In fact, Monarch is the top rated all-in-one personal finance app. It gives you a comprehensive view of all of your accounts, investments, transactions and more.

[00:07:26] Create custom budgets, track progress towards financial goals and collaborate with your partner. And now get an extended 30-day free trial when you go to monarchmoney.com.ofd After trying out Monarch for myself, I understand why it's the top rated personal finance app.

[00:07:45] And right now, listeners of this show will get an extended 30-day free trial when you go to monarchmoney.com.ofd That's M-O-N-A-R-C-H-M-O-N-E-Y.com.ofd for your extended 30-day free trial. When you're working on paying off debt, it helps to first accurately diagnose the issue.

[00:08:11] Perhaps you racked up debt due to a temporary drop in income or circumstance like a medical issue. Or maybe this is a systemic issue that is likely to get worse over time regardless if you have moments of debt freedom.

[00:08:26] If you've never been able to make ends meet and you've always lived paycheck to paycheck, you likely have a systemic issue. Perhaps your income is simply too low. No matter how much you track your spending, reduce your expenses and look at your budget, the numbers just don't work.

[00:08:44] If that were me, I wouldn't worry too much about aggressive debt payoff. I would put more of my effort and brainpower into hustling to find a new job or somehow increase my income.

[00:08:57] But let's say you were like me when I first took a good look at my finances. I made a decent income, but I still had a systemic issue. I spent more than I earned and racked up credit card debt simply because I wasn't paying attention.

[00:09:13] In my case, the act of tracking spending, budgeting, prioritizing saving and paying off debt were great strategies. And they helped me get out of 30 grand of debt in 11 months. But the only reason why that worked is because I accurately diagnosed the problem. I didn't have an income problem.

[00:09:33] I was financially illiterate and I had a money management problem. But that should do it for today. Have a happy rest of your day and weekend, and I'll see you for the Monday show tomorrow where your optimal life awaits.